The Impact of Non-Performing Loans of Public and Private Banks on Economic Growth in Iran

The banking industry is one of the most important and fundamental sectors of the economy and the main bedrock for the growth and dynamism of the financial system and consequently economic growth and development. One of the problems that various countries, including Iran, are facing in the current situation is the increase in         non-performing loans of banks in relation to the total loans granted in the banking system, which indicates an increase in credit risk, reduced quality of assets of this system and possible financial stabilization in the future. The ratio of non-performing loans has different effects on macroeconomic variables due to the different functions of private and public banks. On the other hand, one of the most important macroeconomic variables, economic growth means a continuous increase in the level of production of society, which reflects the level of welfare and economic power of any society. If the non-performing loans increase, the lending power of banks wil decrease while increasing the need for public and private reserves of banks to manage its risk. This will reduce the possibility of financing in the economy and the country's economic growth. In this study, using the Fully Modified Ordinary Least Squares Method (FMOLS), the effect of the increase of non-performing loans by public and private banks on Iran's economic growth is shown. The results of this study show that increasing the ratio of non-performing loans of public and private banks has similarly reduced Iran's economic growth. Also, private sector credit, employees with university degrees and gross fixed capital formation have a positive effect on economic growth while price index and government size have a negative effect on it.